Earlier this week, Sir Jon Cuncliffe, the bank’s Deputy Governor for Financial Stability, outlined his concern about the rise in prominence of un-backed and backed cryptoassets. Specifically, the financial expert warned that the lack of regulation over currencies such as Bitcoin could result in a devastating economic crash. Sir Jon made a direct comparison between the growing popularity in cryptocurrency and the US market boom in sub-market mortgages, which exacerbated the economic crisis over a decade ago.
In 2021 alone, cryptocurrencies have grown by around 200 percent to an estimated $2.3 trillion (£1.7 trillion) from $800 billion (£528 billion) the year before.
Bitcoin and fellow cryptocurrency Ethereum fell dramatically in value earlier this year, however both assets have recovered in recent months and reached all-time highs.
Currently, the value of a single Bitcoin stands at $56,000 (£41,000) today, compared to $700 (£513) five years ago.
Over the last couple of years, Sir Jon has analysed and monitored the exponential growth of crypto across the world as an advisor to the Bank of International Settlements.
Based in Geneva, this particular bank is the G20’s financial stability board, as well as the central banks’ overarching advisory body.
Now part of the Bank of England, Sir Jon is sounding the alarm over the dangers posed by crypto and Bitcoin if regulation is not brought in.
For many investors involved in crypto, the lack of regulation is its main appeal, however recent developments across the pond suggest this will soon change.
Gary Gensler, the Securities and Exchange Commission (SEC) Chairman addressed the United States Congress last month and confirmed that the regulator was working to create a set of rules to manage the voltaire crypto market.
Back in the UK, Sir Jon’s intervention is the latest evidence that financial and regulatory bodies across the globe are taking crypto regulation seriously.
In the speech, he said: “The collapse of the $1.2 trillion market in sub-prime mortgage backed securities in 2008 triggered the great financial crisis.
“In that case, the knock-on effects of a price collapse in a relatively small market was amplified and reverberated through an un-resilient financial system causing huge and persistent economic damage.
“Whether a major price correction is absorbed by the system, admittedly leaving some investors with very sore heads or whether it is amplified into a systemic impact depends on a number of key characteristics of how the asset is integrated into the financial system, especially interconnectedness and leverage.
“It depends also on the resilience of the system at the time of the correction – the liquidity in the system under stress and the ability of core elements of the system to absorb any losses.
“So a necessary thought experiment from a financial stability perspective is what would happen in the financial system if there was a massive collapse in the price of unbacked cryptoassets – at the extreme end, if the price fell to zero.
“Such a collapse is certainly a plausible scenario, given the lack of intrinsic value and consequent price volatility, the probability of contagion between cryptoassets, the cyber and operational vulnerabilities, and of course, the power of herd behaviour.
“Indeed the stress test scenarios to which we and other authorities subject the banking system are if anything much further into the tail of the probability distribution.
“The financial system is far more resilient today than it was in the recent past, following the reforms put in place in the post-crisis period.
“Of course, this does not mean there are no challenges, as the market disruption at the onset of Covid-19 (the ‘Dash for Cash’) reveals.”
According to Sir Jon, regulatory guidance drafted by the financial bodies that regulate the world’s financial markets had taken two years to write.
During this period of time, crypto trading platforms for these currencies had expanded exponentially.
Time will tell whether regulators will be able to catch up with the ever expanding world of Bitcoin and cryptocurrency.